Fannie Mae 2012 Annual Report Download - page 83

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Net interest income increased during 2011, as compared with 2010, due to lower interest expense on debt, which was
partially offset by lower interest income on loans and securities. The primary drivers of these changes were:
• a reduction in the interest expense of debt of consolidated trusts driven by a decrease in rates. The rate on debt of
consolidated trusts is generally driven by mortgage rates of loans securitized in MBS, and these mortgage rates
declined in 2011;
• lower interest expense on funding debt due to lower borrowing rates, which allowed us to continue to replace
higher-cost debt with lower-cost debt;
• lower interest income on mortgage securities due to a decrease in the balance of our mortgage securities, as we
continue to manage our portfolio to the requirements of the senior preferred stock purchase agreement; and
• lower yields on mortgage loans as new business acquisitions continue to replace higher-yielding loans with loans
issued at lower mortgage rates. The reduction in interest income on loans due to lower yields was partially offset by
a reduction in the amount of interest income not recognized for nonaccrual mortgage loans, due to a decline in the
balance of nonaccrual loans in our consolidated balance sheets as we continued to complete a high number of loan
modifications and foreclosures.
Additionally, our net interest income and net interest yield were higher than they would have otherwise been in 2010 through
2012 because our debt funding needs were lower than they would otherwise have been as a result of the funds we received
from Treasury under the senior preferred stock purchase agreement and because dividends paid to Treasury are not
recognized in interest expense.
We initially recognize mortgage loans and debt of consolidated trusts in our consolidated balance sheets at fair value. We
recognize the difference between (1) the initial fair value of the consolidated trust’s mortgage loans and debt and (2) the
unpaid principal balance as cost basis adjustments in our consolidated balance sheets. These cost basis adjustments are
amortized over the contractual life of the underlying loans as a component of net interest income. Cost basis adjustments
related to consolidated debt that is in a premium position are amortized as an income component within net interest income,
while cost basis adjustments related to underlying mortgage loans that are in a premium position are recognized as an
expense component within net interest income. Net unamortized premiums on debt of consolidated trusts exceeded net
unamortized premiums on the related mortgage loans by $16.8 billion as of December 31, 2012, compared with $8.7 billion
as of December 31, 2011. The increase is primarily due to higher prepayment volumes which significantly increased our
portfolio securitization transactions during 2012.
We had $15.8 billion in net unamortized discounts and other cost basis adjustments on mortgage loans of Fannie Mae
included in our consolidated balance sheets as of December 31, 2012 compared with $17.9 billion as of December 31, 2011.
The extent to which we may record these discounts and other cost basis adjustments as income in future periods will be based
on the actual performance of the loans.
Mortgage loans average balance includes loans on nonaccrual status while interest income on these loans is recognized when
collected. Table 12 displays the interest income not recognized for loans on nonaccrual status and the resulting reduction in
our net interest yield on total interest earning assets for the periods indicated.
Table 12: Impact of Nonaccrual Loans on Net Interest Income
For the Year Ended December 31,
2012 2011 2010
Interest
Income not
Recognized
for
Nonaccrual
Loans(1)
Reduction
in Net
Interest
Yield(2)
Interest
Income not
Recognized
for
Nonaccrual
Loans(1)
Reduction
in Net
Interest
Yield(2)
Interest
Income not
Recognized
for
Nonaccrual
Loans(1)
Reduction
in Net
Interest
Yield(2)
(Dollars in millions)
Mortgage loans of Fannie Mae. . . . . . . . . . . . . . . . . . . . $ (3,403) $ (4,666) $ (4,721)
Mortgage loans of consolidated trusts . . . . . . . . . . . . . . (594)(896)(3,692)
Total mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (3,997)(12)bps $ (5,562)(18)bps $ (8,413)(26)bps
__________
(1) Amount includes cash received for loans on nonaccrual status.
(2) Calculated based on annualized interest income not recognized divided by total interest-earning assets, expressed in basis points.
For a discussion of the interest income from the assets we have purchased and the interest expense from the debt we have
issued, see the discussion of our Capital Markets group’s net interest income in “Business Segment Results.”